chapter 8 truth in lending rescission in bankruptcy pl94ch08

8/4/2019 Chapter 8 Truth in Lending Rescission in Bankruptcy PL94Ch08

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Chapter 8 Truth In Lending Rescission in Bankruptcy Court

8.1 TIL Rescission Letter

This rescission letter is quite detailed. Truth in Lending does not require this type of completeness.In fact, the model rescission letter found at National Consumer Law Center, Truth in Lending Appx.

E (2d ed. 1989 and Supp.) is quite short. Moreover, the Rescission Model Forms in FRB RegulationZ, Appendices H-8 and H-9 are shorter still, merely stating "I wish to cancel," and signed and datedby the consumer. The consumer's attorneys in the case being reprinted chose a detailed rescissionletter because they believed it would lead to a quicker and more beneficial settlement of the case --that it is best to present to the creditor the consumer's case in as much detail and as persuasivelyas possible as early as possible.

January 22, 1993

VIA CERTIFIED MAILSusan Black, PresidentStreet Financial, Inc.100 Natick RoadWorcester MA

Re: John Homeowner - Rescission of Mortgage Loan Dated November 29, 1990 Pursuant toMassachusetts General Laws, c. 140D, 10

Dear Ms. White:

I represent John Homeowner, a Street Financial Services, Inc. ("Street") mortgagor. Mr.

Homeowner refinanced his principal residence with Street on November 29, 1990. On January 15,

l993, you sent Mr. Homeowner a demand letter informing him that you were to begin foreclosure

proceedings next week if he did not immediately pay off the Street loan. Because the refinancing

transaction which you base this demand on contained several violations of the state Truth in Lending

Act (M.G.L. c.140D, 1 et seq.) ("TILA"), my client has authorized me to rescind the transaction

pursuant to c.140D, 10, and the Massachusetts Banking Commissioner's Regulations promulgated

thereunder, 209 CMR 32.23.

The following synopsis of the facts and law which outlines Mr. Homeowner's right to rescind

incorporates citations to the federal Truth in Lending Act (15 USC 1601, et. seq.), the Federal

Reserve Board Regulations promulgated thereunder (12 CFR 226.1 et. seq., "Regulation Z"); the

Official Staff Commentary of the Federal Reserve Board; and relevant federal case law. As the

Massachusetts TILA and regulations are identical to the federal statutory and regulatory scheme in


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all substantive aspects, the state courts are guided by this federal law in interpreting the cognate

provisions of state law. Therefore, although reference is made to federal law throughout this letter

for illustrative purposes, the rescission claim and all other claims made herein are solely grounded

in state law.

Truth in Lending: Material Disclosures and Rescission Rights

The purpose of TILA is to enable consumers to intelligently shop for credit (15 USC

1601(a)). To achieve this purpose, TILA requires that the true "cost" of credit be stated as both an

interest rate (annual percentage rate, or APR) and as a dollar amount (Finance Charge). The APR

incorporates certain fees and charges imposed as part of the credit transaction, and which Congress

has determined to constitute part of the "costs" of obtaining financing. Correspondingly, the finance

charge discloses the net effect of such additional costs of credit as a dollar figure. Therefore, the

finance charge may equal the sum of any points, broker's fees, credit insurance, and other charges

which, in the particular context, TILA requires the disclosure of as credit costs.

As such, a note with a ten percent interest rate, executed as part of a transaction which

imposed such additional "finance charges," may have an APR, or "true" interest rate, of 12%. Only

when a creditor makes accurate disclosure of the true cost of credit can a consumer compare different

lenders' offerings and make the informed credit decision which is TILA's goal. To provide a

self-enforcement mechanism which promotes such accurate disclosures, Congress provided that the

failure of a creditor to comply with certain of TILA's disclosure requirements (the "material

disclosures") gives the borrower an extended right to rescind the transaction. See, G.L. c.140D, 10;

209 CMR 32.23; 15 USC 1635; Regulation Z, 226.23.

Here, Street has violated TILA in a number of respects. The violations which give rise to Mr.

Homeowner's right to rescind this transaction include, but are not limited to, the following.


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Unfair and Deceptive Conduct and Disclosure Laws Violations

In the fall of 1990, Mr. Homeowner responded to Easy Cash Inc. ("Easy Cash") television

and print advertisements offering low interest rate loans by visiting the Easy Cash offices seeking

information about obtaining a mortgage loan to refinance his home. Mr. Homeowner met with Easy

Cash representative Lisa Smith. Ms. Smith informed him that his poor credit precluded a long term,

low interest rate loan, but that if he took out a two year loan with a balloon payment and made his

payments on time, that the Easy Cash would then provide long term, low interest refinancing as

offered in its advertising. Ms. Smith provided Mr. Homeowner with a blank mortgage application

and procured his signature on it. Mr. Homeowner was never provided with a copy of either the

application form he signed or the completed application. As such, Mr. Homeowner never received

the statutorily required notice mandated by Mass. General Laws, c.184, 17B. Mr. Homeowner had

no further contact with Easy Cash until he was subsequently informed that he had been given a loan

commitment.

Mr. Homeowner was led to believe and did believe that Easy Cash was a lender. In fact,

Easy Cash does not provide financing, but instead arranges or "brokers" financing with Street and

other lenders. Easy Cash did not inform Mr. Homeowner either that it was a broker and not a lender,

or that it would impose a broker's fee for the purported service of arranging the Street loan.

Easy Cash is owned, operated and controlled by William Black. Mr. Black is Easy Cash's

sole shareholder, officer and director. Street is owned, operated and controlled by Susan Black,

William Black's sister. Ms. Black is Street' sole shareholder, officer and director. At all times

relevant to this matter, Easy Cash and Street shared the same office address, 100 Natick Road

Worcester, Massachusetts. Street indirectly imposed the broker's fee by informally requiring that

all borrowers be channelled to it through Easy Cash or other brokers. This practice was a device to

accomplish three goals: to increase not only Easy Cash's profit, but Street' as well; to avoid the


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application of Massachusetts points and fees statute, c.183, 63, which prohibits lenders from

charging more than two points on any consumer mortgage loan; and to circumvent the application

of TILA, which requires such conduit "broker's fees" to be disclosed as components of the finance

charge.

On November 29, 1990 Mr. Homeowner drove to the loan closing location, the office of

attorney Larry Lawyer. Mr. Lawyer's office, like the offices of Street and Easy Cash, was also

located at 100 Natick Road, Worcester, Massachusetts. Mr. Lawyer was the closing attorney for

Street. However, it was not until Mr. Lawyer provided him with loan papers indicating that Street

was the lender that Mr. Homeowner learned that Easy Cash was not directly providing the financing.

Without Mr. Homeowner's consent or knowledge Easy Cash acted either through a correspondent

lender contract, as broker, or as Street' agent. In any event, Easy Cash did not act pursuant to any

agreement with Mr. Homeowner, either written or verbal. Easy Cash did not act in Mr.

Homeowners' best interests, but rather as agent for Street, in violation of G.L., c.271, 39.

TILA: Material Disclosure Violations

The conduct described above leading up to the consummation of the loan, in addition to the

specific statutory violations cited, is rife with violations of c.93A. In addition, this conduct, as well

as that which took place at the closing, violated TILA and gave rise to Mr. Homeowner's right to

rescind this transaction. The independent bases on which this rescission right is based are

detailed below.

1. Failure to Disclose Broker Fees as Finance Charges

One of the documents Mr. Lawyer required Mr. Homeowner to sign as a condition of

obtaining the loan was a so-called "Consulting Agreement" purporting to authorize the payment of


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almost ten percent of the loan proceeds, two thousand nine hundred fifty-four ($2,954.00) dollars,

to Easy Cash. Mr. Homeowner had never seen this agreement before, and had no idea that Easy

Cash was a broker, much less that it would charge this amount as a fee. (A copy of this "Consulting

Agreement" is attached to this correspondence as Exhibit "A") [not reprinted infra]. Nevertheless,

Mr. Homeowner signed the agreement because he was led to believe that execution of the

"consulting" agreement authorizing Easy Cash's fee of almost ten points was a condition of obtaining

the financing.

In accordance with the purported agreement, Mr. Lawyer subsequently paid a $2,954.00

broker's fee to Easy Cash. However, this fee was not disclosed to Mr. Homeowner as a finance

charge. Only the additional one point which Street' charged was disclosed as a finance charge. This

failure to disclose the broker's fee as a finance charge violates TILA. Where the lender requires the

payment of a fee to a broker as a condition of or incident to the granting of a loan, the broker's fee

must be included in the finance charge, and therefore also factored into the calculation of the annual

percentage rate. 209 CMR 32.4(b)(3); Regulation Z, 226.4(b)(3). See,In re Dukes, 24 B.R. 404

(Bankr. E.D. Mich. 1982);Johnson v. Fleet Finance, Inc. 1992 WL 37648 (S.D. Ga., Feb. 21, 1992).

See, e.g. G.L. c.255, 12F (where relative acts as conduit in credit transaction the creditor is subject

to all claims and defenses borrower may assert against the related party "arranger" of credit). Street

failed to so disclose the broker's fee as a finance charge and therefore understated both the finance

charge and the APR in amounts exceeding TILA's error tolerance. In so doing Street also misstated

the amount financed, which is overstated by the amount of the broker's fee.

2. Overstated Fees

Charges which would otherwise be excludable pursuant to Regulation Z must be disclosed

as components of the finance charge if they are not bona fide and reasonable. By failing to disclose

the following charges as components of the finance charge, Street has violated Regulation Z,


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226.4(c)(7), and 209 CMR 32.4(c)(7). (All of the following charges are shown on the copy of

Street' "Loan Accounting and Disbursement Authorization" attached to this correspondence as

Exhibit "B")

Legal and associated fees paid to Larry Lawyer

Attorney's Fees $1,040

Document Preparation $195

Amortization Schedules $25

Total $1,260

The $1,040 charge alone for attorney's fees for closing the loan far exceeds the range of

charges normally imposed by experienced lender's counsel on loans of this type. As such, the

excessive portion is an undisclosed finance charge. SeeR. Rohner, The Law of Truth in Lending

3.03(2)(a) (1984). In addition, the $195 charge for document preparation and $25 amortization

schedules charge are merely disguised as separate costs in order to make the actual $1,260 legal fee

appear lower. Mr. Homeowner, in fact, neither requested nor received the amortization schedules

for which he was charged, nor is the $25 charge the bona fide and reasonable cost of producing such

computer generated schedules on a two year note. Finally, to the extent that the attorney's fees

charged actually conceal additional lender profit, they constitute an undisclosed finance charge. See

Therrien v. Resource Financial Group, 704 F.Supp. 322 (D.N.H. 1989).

Title and Recording Fees

Full Title Examination $250

Updating of Title; Recording of Documents $ 50

Mortgage Recording $ 25


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Assignment of Mortgage $ 10

Discharge of Mortgage and Liens N/A

The two hundred fifty ($250.00) dollar charge for full title examination precludes any need

to "update" the title. In addition, the only document recorded was the mortgage, for which a separate

$25 fee was imposed. Nevertheless, Street charged Mr. Homeowner fifty dollars for its purported

"Updating of Title; Recording of Documents." Some portion of the $50 fee was presumably

allocated to the cost of the unnecessary "title update" and the remainder to the contrived cost of

recording non-existent documents. To the extent that these "costs" were not fees paid to public

officials as indicated, they are finance charges. Regulation Z, 226.4(e)(1); 209 CMR 32.4(e)(1);

Abbey v. Columbus Dodge 607 F.2d 85 (5th Cir. 1979) (where, contrary to disclosures, creditor

retained and did not pay to public officials an itemized $37.50 "filing fee," the fee was a finance

charge).

Finally, the $10 fee for the "assignment of mortgage" is also a finance charge. Regulation

Z, 226.4(b)(6); 209 CMR 32..4(b)(6);In re Brown , 106 B.R. 852, 858-859 (Bankr. E.D. Pa. 1989);

Cheshire Mortgage Service v. Montes, 223 Conn. 80 (1992).

Inaccurate Material Disclosures

Accordingly, the Truth in Lending Disclosure Statement misstates at least three of the

material disclosures mandated by law, by its:

! failure to accurately disclose the finance charge, in violation of Regulation Z, 226.18(d)

and 209 CMR 32.18(d);


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! failure to accurately disclose the amount financed, in violation of Regulation Z, 226.18(b)

and 209 CMR 32.18(b); and

!failure to accurately disclose the annual percentage rate, in violation of Regulation Z,

226.18(e) and 209 CMR 32.18(e).

Street' failure to accurately make these material disclosures resulted in a misstated amount

financed and an understated finance charge and APR in amounts exceeding TILA's error tolerance,

all in violation of Regulation Z, 226.18(b)(d) and (e), and 209 CMR 32.18(b)(d) and (e).

Demand for Relief

The failure to accurately make the above-noted material disclosures tolls Mr. Homeowner's

rescission right until the earlier of Street' provision of such rescission right notices and corrected

material disclosures, or the passage of four years subsequent to consummation of the transaction.

G.L. c.140D, 10, 209 CMR 32.23(a)(3). Cf., 15 USC 1635, Regulation Z, 226.23(a)(3).

Accordingly, please be advised that by this correspondence Mr. Homeowner rescinds Street'

security interest in his property pursuant to c.140D, 10. As a result of this rescission notice Street'

security interest is void (209 CMR 32.23(d)(1); Regulation Z, 226.23(d)(1)) and Street is bound to

immediately terminate such security interest. 209 CMR 32.23(d)(2); Regulation Z, 226.23(d)(2).

In addition, Street has twenty days from its receipt of this notice to return to my client all monies

paid in connection with the terms of the mortgage loan which is the subject of this letter. Id. My

client hereby requests an itemization of such monies. Upon Street' discharge of its statutory duties,

my client will perform all necessary actions required by G.L. c. 140D, 10.

Failure to cancel the security interest and return to my client all monies due may subject


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Street to actual and statutory damages, pursuant to G.L. c.140D, 32, as well as multiple damages

for corresponding violations of c.93A. See, G.L. c.140D, 34.

Sincerely,

Attorney for Homeowner

cc: John Homeowner

State Attorney General

8.2 Complaint in Bankruptcy Court Objecting to Secured Claim

UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF MASSACHUSETTS

EASTERN DIVISION

In Re:

John Homeowner

Debtor

John Homeowner

Plaintiff

[vs.]

Street Financial Services, Inc.

Defendant

Chapter 13

Case No. 93-XXXXX-ABC

Adversary Proceeding No. 94-XXXX


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VERIFIEDCOMPLAINT OBJECTING TO SECURED CLAIM

Introduction

1. This adversary proceeding is brought by the plaintiff debtor pursuant to 11 U.S.C. 502

to object to the allowed secured claim of defendant Street Financial Services, Inc. ("Street") on the

basis that the security interest held by Street has been properly rescinded pursuant to 1635 of the

Truth-in-Lending Act, (TILA) 15 U.S.C. 1601 et seq. Plaintiff John Homeowner seeks injunctive

relief and damages to enforce his rescission of a mortgage held by the defendant Street. The plaintiff

seeks a preliminary injunction to restrain Street from refusing to honor his valid rescission of the

transaction and by that unlawful refusal preventing a pending mortgage refinancing by US Trust

Company which would lower his interest rate by approximately thirteen percent, from the nineteen

percent charged by Street, to the six percent offered by US Trust. The plaintiff also seeks a

determination on the merits that:

! he has properly rescinded the mortgage held by Street and that Street has no valid securedor unsecured claim;

! that Street' refusal to honor his valid rescission notice in accordance with TILA's

requirements eliminates any alleged indebtedness to Street: and

! that Street is required to return to him all monies he has paid in connection with themortgage loan transaction which is the subject of this lawsuit.

In addition, the plaintiff seeks statutory damages, costs, and attorney's fees for Street' failure

to honor his valid rescission notice in conformity with the requirements of TILA. The plaintiff also

asserts pendent claims pursuant to M.G.L. c. 140D, the state truth in lending act, which contains

corollary provisions identical to the federal TILA, M.G.L. c.183, 63, and the state common law.


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Jurisdiction

2. Jurisdiction of the Bankruptcy Court in this matter is provided by 28 U.S.C. 1334 and

157, as amended. This is a core proceeding.

Parties

3. The Plaintiff, John Homeowner, is a natural person who resides at 10 Joseph Street,

Boston, Massachusetts. Mr. Homeowner has occupied this home with his family of six for sixteen

years. Mr. Homeowner is a debtor in this Court, having filed a petition pursuant to Chapter 13 of

the Bankruptcy Code on October 27, l993.

4. Defendant, Street Financial Services, Inc. is a corporation with a principal place of

business at 100 Natick Road, Worcester MA.

Facts

5. In the fall of 1990, Mr. Homeowner responded to The Easy Cash, Inc. ("Easy Cash")

television and print advertisements offering low interest rate loans by visiting the Easy Cash offices

seeking information about obtaining a mortgage loan to consolidate his debts.

6. A Easy Cash representative informed Mr. Homeowner that he had poor credit and that this

precluded Easy Cash from providing him with the long term, low interest rate loan advertised.

7. The Easy Cash representative then promised Mr. Homeowner that if he took out a two year

loan with a balloon payment and made his payments on time, the Easy Cash would then provide long

term, low interest refinancing as offered in its advertising.

8. These inducements persuaded Mr. Homeowner to apply to Easy Cash for such a loan.


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9. The Easy Cash representative provided Mr. Homeowner with a blank mortgage application

and procured his signature on it.

10. On information and belief, the Easy Cash representative completed the blank, signed

application after Mr. Homeowner left and submitted it to Street.

11. Mr. Homeowner was never provided with a copy of either the blank application form he

signed or the completed application.

12. Mr. had no further contact with Easy Cash until he was subsequently informed that he

had been given a loan commitment. The loan terms were not disclosed to Mr. Homeowner until the

loan closing.

13. Unbeknownst to Mr. Homeowner, the loan commitment was given by Street. Neither

Easy Cash nor Street informed Mr. Homeowner of this fact, which he discovered only upon reading

the documentation first provided to him at the loan closing.

14. On or about November 29, 1990, Street loaned Mr. Homeowner thirty one thousand

($31,000.00) dollars, secured by a second mortgage on his home.

15. The loan terms were as follows:

! Upwardly Adjustable Interest rate: The note rate was 15.99% per annum for the first threemonths of the loan, then was to be adjusted to the greater of 18% per annum or the Bank of NewEngland prime rate plus ten percentage points. The loan could only be adjusted upward, the ratecould not decrease, and had to increase by at least two points, to 18%, after the first three months.The loan did contain a 36% percent per annum rate ceiling. At the change date the rate wasincreased to nineteen (19%) per annum. The annual percentage rate was disclosed as 26.25%.

! Monthly Payments: The loan was non-amortizing, payments were of interest only.Monthly payments for the first three months were four hundred thirteen dollars and eight cents($413.08). Payments thereafter were of four hundred ninety dollars and eighty three cents ($490.83).


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! Loan term: Two years. A balloon payment of the entire principal and any accrued interestwas due November 28, l992.

! Points: Street collected and retained an origination fee of one percentage point, threehundred ten ($310.00) dollars.

!Rate Buydown: Street collected and retained two thousand nine hundred eighty one($2,981.00) dollars as a "rate buydown."

! Broker's Fees: Street collected two thousand nine hundred and fifty four ($2,954.00)dollars of the loan proceeds and disbursed them to Easy Cash, as a "Financial Consultant."

16.Easy Cash, now defunct, was in actuality a mortgage broker, which arranged financing

for Street and other lenders, and collected a broker's fee drawn from the loan proceeds disbursed by

the lender.

17. Street' sole shareholder, officer and director, Susan Black, is the sister of William Black,

the sole shareholder, officer and director of Easy Cash during its existence. The siblings, at all times

relative hereto, shared offices at 100 Natick Road, Worcester, Massachusetts.

18. At all times relevant hereto Street was a creditor within the meaning of TILA.

19. Mr. Homeowner's secured loan with Street is a consumer credit transaction within the

meaning of TILA.

Count I: Misrepresentation

20. Neither Easy Cash nor Street disclosed the true nature of Easy Cash's role in the loan

transaction, or the fact that it would impose a broker's fee for the purported service of arranging the

Street loan.

21. Because of various misrepresentations made by Easy Cash, and based on the manner in

which Easy Cash held itself out, Mr. Homeowner was led to believe that Easy Cash was the lender


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from whom he would be obtaining his loan.

22. Neither Easy Cash nor Street ever provided Mr. Homeowner with any loan brokerage or

commission agreement prior to the closing, nor did Mr. Homeowner at any point prior to the closing

sign such an agreement.

23. Neither Easy Cash nor Street ever informed Mr. Homeowner that Easy Cash was not the

direct lender who would be providing his loan.

24. It was not until he was handed the loan papers at the closing that Mr. Homeowner

learned that Easy Cash was a broker and that Street was to be his lender.

25. Without Mr. Homeowner's consent or knowledge, and without any written or oral

agreement with the plaintiff, Easy Cash acted as an agent for Street in arranging the loan.

Count II: Breach of Contract

26. Street charged Mr. Homeowner two thousand nine hundred eighty one ($2,981.00)

dollars as a "rate buydown."

27. This payment was ostensibly made to reduce his interest rate or to reduce the monthly

payments he was to make.

28. Street did not reduce the note rate.

29. Street intended for Mr. Homeowner to make the buydown payment in reliance on its

representation about the reduced rate and payments, Mr. Homeowner did so rely, and Street


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intentionally failed to reduce the rate and payments as represented.

Count III: Violation of M.G.L. c. 183, 63

30. Massachusetts' points and fees statute, c.183, 63, prohibits lenders from charging more

than two points on any consumer mortgage loan.

31. A "rate buydown" constitutes points within the meaning of the statute.

32. Street charged Mr. Homeowner more than ten points on his loan, in violation of c.183,

63.

Truth in Lending Act Violations

Counts IV and V: Failure to Timely Provide the Truth in Lending Disclosure Statementand the Notice of Right to Rescind

33. At the closing, Street presented Mr. Homeowner with a document entitled "Disclosure

Statement" and obtained his signature acknowledging receipt of a copy of the document. A copy of

this document is attached and incorporated herein as Exhibit A. [Not reprinted infra.]

34. At the closing, Street presented Mr. Homeowner with a document entitled "Notice of

Right to Cancel" and obtained his signature acknowledging receipt of two copies of the document.

A copy of this document is attached and incorporated herein as Exhibit B. [Not reprinted infra.]

35. In fact, Street did not provide to Mr. Homeowner a copy of the Disclosure Statement, a

copy of the Notice of Right to Cancel, or a copy of any other loan documents until more than three

business days after the loan closing. Street instead informed Mr. Homeowner that all of his loan

papers and his check would be mailed to him in a few days.


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36. Street failure to provide Mr. Homeowner at the loan closing with a copy of his

Disclosure Statement is a violation of 15 USC 1638(a) and (b)(1), and M.G.L. c. 140D, 12(a)

and (b)(1), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and

M.G.L. c. 140D, 10(a).

37. Street' failure to provide Mr. Homeowner at the loan closing with a copy of his notice

of the right to rescind the transaction is a violation of 15 USC 15 USC 1635(a) and M.G.L. c. 140D,

10(a) and 12(a), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a)

and M.G.L. c. 140D, 10(a).

Failure to Disclose Finance Charges

38. At the closing, Street presented Mr. Homeowner with a document entitled "Loan

Accounting and Disbursement Authorization." A copy of this document is attached and incorporated

herein as Exhibit C. [Not reprinted infra.]

39. Comparison of Street' Disclosure Statement and Loan Accounting and Disbursement

Authorization shows that it disclosed only its origination fee, odd days interest, and rate buydown

as finance charges.

Count VI: Failure to Disclose Broker Fees as Finance Charges

40. Street required Mr. Homeowner to authorize the payment of two thousand nine hundred

and fifty four ($2,954.00) dollars of the loan proceeds to Easy Cash as a condition of the loan being

made. A copy of the Easy Cash "consulting" agreement purportedly authorizing this payment is

attached and incorporated herein as Exhibit C1. [Not reprinted infra.]

41. Street informally required that borrowers be channelled to it through Easy Cash or other


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brokers.

42. Street and Easy Cash acted in concert in this enterprise, and engaged in an ongoing

pattern of similar misrepresentations with respect to substantial numbers. See Exhibit D, Complaint

of the Attorney General in Commonwealth v. Easy Cash, Inc., Street Financial Services, Inc., and

William Black, Suffolk Superior Court, Civil Action No. 91-xxxx, and accompanying consumer

affidavits filed therewith.

43. Street's failure to disclose this "broker's fee" as a finance charge is a violation of 15 USC

1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to rescind the transaction

pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

Count VII: Failure to Disclose Appraisal Fee as Finance Charge

44. Easy Cash charged Mr. Homeowner two hundred fifty dollars ($250.00) for an appraisal

of his home. See Exhibit E, Easy Cash letter re purchase of appraisal.

45. The Easy Cash letter describing the "agreement" to purchase the appraisal was presented

to Mr. Homeowner at the closing by Street' closing attorney.

46. The two hundred fifty ($250.00) dollar charge was paid outside of the closing (POC) and

reflected on Street's itemization of loan proceeds (Exhibit C).

47. M.G.L. c. 184, 17C requires first mortgage lenders to provide written notice to

borrowers of their right to obtain upon request a free copy of the lender's appraisal of the borrower's

home.

48. The charge for the appraisal is neither bona fide nor reasonable.


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49. Mr. Homeowner neither requested nor received the appraisal for which he was charged.

50. Street's failure to disclose this fee as a finance charge is a violation of 15 USC



Count VIII: Failure to Disclose Amortization Schedule Charge as Finance Charge

51. Street charged Mr. Homeowner twenty five dollars ($25.00) for an amortization schedule.

52. As this is a non-amortizing loan, there is no need for an amortization schedule.

53. Mr. Homeowner neither requested nor received the amortization schedule for which he

was charged.

54. Street' charge for an amortization schedule is neither bona fide nor reasonable.

55. Street' failure to disclose this fee as a finance charge is a violation of 15 USC 1638(a)(3)

and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to rescind the transaction pursuant to 15

USC 1635(a) and M.G.L. c. 140D, 10(a).

Count IX: Unreasonable and Non-Bona Fide Attorney's Fees

56. Street charged Mr. Homeowner one thousand and forty dollars ($1,040.00) in attorneys

fees.

57. The one thousand and forty dollar amount exceeds the range of bona fide and reasonable

charges normally imposed by experienced lender's counsel on loans similar to Mr. Homeowner's.


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58. The attorney's fees are neither bona fide nor reasonable.

59. Street's failure to disclose the excessive portion of the attorney's fees as a finance charge

is a violation of 15 USC 1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to

rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

Count X: Unreasonable and Non-Bona Fide

Document Preparation Charges

60. Street charged Mr. Homeowner one hundred ninety five ($195.00) dollars for document

preparation.

61. This document preparation charge was neither bona fide nor reasonable.




Counts XI and XII: Unreasonable and Non-Bona FideRecording and Title Charges

63. Street imposed the following title and recording fee charges upon Mr.Homeowner.

Full Title Examination $250Updating of Title; Recording of Documents $ 50Mortgage Recording $ 25Assignment of Mortgage $ 10

64. Street's two hundred fifty ($250.00) dollar charge for full title examination precluded any

need to "update" the title.


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65. The only document recorded in connection with this transaction was the mortgage, for

which a separate $25 fee was imposed by the Register of Deeds.

66. Street's failure to disclose as a finance charge the portion of the $50 fee allocated to the

cost of the unnecessary "title update" is a violation of 15 USC 1638(a)(3), entitling Mr. Homeowner

to rescind the transaction pursuant to 15 USC 1635(a).

67. Street's failure to disclose as a finance charge the portion of the $50 fee allocated to the

cost of "recording of documents," where such "costs" were not fees paid to public officials, is a

violation of 15 USC 1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to

rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

Count XIII: Failure to Disclose Assignment Recording Cost

as Finance Charge

68. Street imposed a ten dollar ($10.00) fee upon Mr. Homeowner for the cost of recording

an "assignment of mortgage" but did not record any such assignment.




Counts XIV-XVI: Street' Inaccurate Material Disclosures

70. Street' failure to disclose the amounts described above in paragraphs 33 - 69 as finance

charges pursuant to 15 U.S.C. 1638 and M.G.L. c. 140D, 12 correspondingly rendered the "finance

charge," "annual percentage rate" and "amount financed" disclosures inaccurate in amounts

exceeding TILA's error tolerance.


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71. By failing to accurately disclose the finance charge, Street violated 15 U.S.C. 1638(a)(3)

and M.G.L. c. 140D, 12(a)(3).

72. By failing to accurately disclose the amount financed, Street violated 15 U.S.C.

1638(a)(2)(A) and M.G.L. c. 140D, 12(a)(2)(A).

73. By failing to accurately disclose the annual percentage rate, Street violated 15 U.S.C.

1638(a)(4) and M.G.L. c. 140D, 12(a)(4).

Count XVII: Failure to Honor Mr. Homeowner's Rescission Notice

74. Mr. Homeowner made every payment on the loan on or before the due date.

75. In mid-summer, l992, with the two year balloon coming due, Mr. Homeowner sought to

convert the Street loan to the low interest rate, long term loan the Easy Cash representative told him

he could have if he made his payments on time.

76. Easy Cash informed him that they were no longer making or arranging such loans, and

referred him to Street.

77. Street informed Mr. Homeowner that they would not make such a loan, emphasized that

his balloon note was coming due in a few months and urged him to find alternative financing.

78. On or about January 22, 1993 Mr. Homeowner, through his attorney, notified the

defendant that he was exercising his right to rescind the transaction pursuant to 15 U.S.C. 1635 and

M.G.L. c. 140D, 10. A copy of the letter by which Mr. Homeowner exercised his rescission rights

is attached and incorporated herein as Exhibit F [not reprinted infra.].


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79. Street refused to honor Mr. Homeowner's rescission of the transaction, in violation of 15

U.S.C. 1635(b) and M.G.L. c. 140D, 10(b). A copy of the letter by which Street disavowed the

rescission notice is attached and incorporated herein as Exhibit G [not reprinted infra.].

80. Street' failure to honor Mr. Homeowner's rescission notice eliminates Mr. Homeowner's

obligation to tender the net proceeds of the loan. Pursuant to 15 U.S.C. 1635(b) and M.G.L. c.

140D, 10(b) Mr. Homeowner has no obligation to now tender that unpaid principal.

Counts XVIII and XIX: Breach of Contract

and Unconscionable Conduct

81. US Trust Company issued Mr. Homeowner a loan commitment for forty five thousand

($45,000.00) dollars under a special hardship program with a fixed interest rate of six and one-eighth

percent, to enable him to refinance his first mortgage as well as the Street second mortgage and

preserve his home.

82. The US Trust loan closing was originally scheduled for October 20, l993, but was delayed

for at least one day by Street' failure to provide a payoff figure. On October 21, 1993 Street

demanded a payoff which included over ten thousand ($10,000.00) dollars of charges in addition to

loan principal for accrued interest and legal fees. A copy of the Street payoff communication to US

Trust is attached as Exhibit H [not reprinted infra.].

83. Street was not entitled to these fees under the terms of its loan agreement with Mr.

Homeowner, nor could it demand such charges be paid after his valid rescission was made.

84. Street's attempt to obtain these additional monies prevented Mr. Homeowner from

closing.


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85. Street's conduct was unconscionable and a breach of its contract.

Circumstances Requiring Immediate Issuance

of a Preliminary Injunction

86. Mr. Homeowner's US Trust loan commitment expired of its own terms after the aborted

closing.

87. In light of the circumstances, US Trust has agreed to extend the loan commitment through

January 20, l994.

88. Street's continuing refusal to honor Mr. Homeowner's rescission jeopardizes the

prospective US Trust refinancing.

89. Unless the Court issues a preliminary injunction to allow Mr. Homeowner to close the US Trust

loan on or before January 20, l994, his commitment will expire and there is a substantial likelihood

that he will be unable to requalify for a mortgage refinancing under US Trust's special loan program

or with any other lender.

Requested Relief

WHEREFORE, the plaintiff respectfully requests that this honorable Court:

90. Issue an order of notice ordering defendant to appear on or before January 18, 1994 and

show cause why an injunction should not issue.

91. After a hearing, preliminarily enjoin the defendant from failing to:

a. discharge the mortgage it holds on the plaintiff's home to allow the prospective USTrust refinancing to occur;

b. accept from the prospective US Trust refinancing proceeds of thirty-one thousand($31,000.00) dollars, the principal amount now allegedly owing under the defendant'ssecond mortgage loan; and


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c. immediately upon receipt of these proceeds pay the entire amount into an escrowaccount established under the court's supervision and control, to be held until ajudgment on the merits is rendered.

92. After a trial on the merits:

a. declare that the plaintiff has validly rescinded the transaction, that the defendant'ssecurity interest is therefore void and the defendant's secured claim is disallowed;

b. declare that the defendant's failure to honor the plaintiff 's valid rescission notice inaccordance with the dictates of 15 USC 1635 and M.G.L. c. 140D 10 vests in theplaintiff the right to retain the net loan proceeds and that the defendant has noallowable unsecured claim;

c. enter an order discharging the defendant's second mortgage;

d. enter an order requiring the defendant to refund to the plaintiff all money paid to thedefendant in connection with the transaction;

e. award the plaintiff one thousand ($1,000) dollars in statutory damages for thedefendant's failure to comply with 15 U.S.C. 1638 and c. 140D 12, and award theplaintiff an additional one thousand ($1,000) dollars in statutory damages for thedefendant's failure to comply with 15 U.S.C. 1635(b) and c. 140D 10;

f. award the plaintiff his reasonable attorney's fees and costs; and

g. grant such other relief as the Court deems appropriate and just.

Respectfully submitted

John HomeownerBy his attorney

Date: January 6, 1994

VERIFICATION

COMMONWEALTH OF MASSACHUSETTS

Suffolk, ss. January 5, 1994

I hereby certify that I have read the foregoing Complaint and that the facts contained therein

are true.

John Homeowner

[Notarized]


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8.3 Memorandum In Support of Preliminary Injunction

UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF MASSACHUSETTS

EASTERN DIVISION

In Re:

John Homeowner

Debtor

John Homeowner

Plaintiff

[vs.]

Street Financial Services, Inc.

Defendant

Chapter 13

Case No. 93-XXXXX-ABC

Adversary Proceeding No. 94-XXXX

MEMORANDUM IN SUPPORT OF PLAINTIFF'S MOTION

FOR PRELIMINARY INJUNCTION

I. Introduction

Pursuant to the federal and state Truth in Lending Acts (15 USC 1601 et seq; M.G.L. c.

140D 1 et seq., hereinafter referred to as TILA) the plaintiff, John Homeowner, seeks to enforce

his valid rescission of an unconscionable, high interest rate loan made by the defendant, Street

Financial Services, Inc. ("Street"). Mr. Homeowner seeks injunctive relief so that he may avert

Street' threatened foreclosure and close on a US Trust Company loan commitment which would save


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his home. The proceeds of the US Trust loan, which carries an interest rate thirteen percent lower

than that of the Street loan, would pay Street whatever, if anything, it is legally owed.

On November 29, 1990, Street ostensibly loaned John Homeowner thirty one thousand

($31,000.00) dollars. However, of that thirty one thousand dollars, eight thousand and fifteen

($8,015.00) dollars was immediately retaken by Street, its attorney, and the mortgage broker which

arranged the loan. Before Mr. Homeowner left the loan closing, twenty six percent of what he

thought he was borrowing was recaptured by these three entities, who all shared the same address.

Mr. Homeowner only dealt with Street because he was assured that if he proved he was a

good borrower by making payments on time for the two year term of the note, then instead of calling

the note and demanding the immediate return of that thirty one thousand dollars, Street would make

him a long term, low interest rate loan. Mr. Homeowner kept up his end of the bargain, making

regular payments on time for two years. But Street refused to even discuss the promised new loan,

called the note and is now attempting to foreclose to harvest the equity in Mr. Homeowner's home.

The Attorney General has alleged in a lawsuit that Street and its mortgage broker, Easy Cash,

engaged in these types of lending practices on a regular basis, preying on substantial numbers of

unsophisticated Massachusetts consumers by deceptively inducing them to enter into short term, high

interest rate loans packed with exorbitant fees, most notably thousands of dollars paid to Easy Cash

from the Street loan proceeds for alleged "consulting fees." See Exhibit D to the Adversary

Complaint, Complaint of the Attorney General in Commonwealth v. Easy Cash, Inc., Street

Financial Services, Inc., and William Black, Suffolk Superior Court, Civil Action No. 91-xxxx, and

accompanying consumer affidavits filed therewith.

It is for these reasons that Mr. Homeowner rescinded his Street loan and is now seeking

injunctive relief from this court to enforce his rescission rights. Mr. Homeowner is entitled to that

relief because Street has committed ten independent violations of TILA, any one of which entitled

Mr. Homeowner to rescind his loan. The following fees, enumerated in items 1-5 and 8-10, below,


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which Street required Mr. Homeowner to pay as a condition of closing the loan, are finance charges

as defined by TILA. However, Street did not disclose them as such, thereby understating the finance

charge, annual percentage rate, and amount financed, in violation of TILA. In addition, Street

withheld from Mr. Homeowner all of the disclosures required by TILA until at least six days after

the loan closing. When the documents were provided to Mr. Homeowner, the Notice of Right to

Cancel indicated that his three day rescission period had already passed.

1. Street charged Mr. Homeowner a fee to purchase an amortization schedule for hisloan. However, Mr. Homeowner's loan is non-amortizing.

2. Street charged Mr. Homeowner a fee to record an assignment of the mortgage to athird party.

3. Street charged Mr. Homeowner a fee to "update title" after it had already charged hima two hundred fifty ($250.00) dollar fee for "full title examination."

4. Street charged Mr. Homeowner an undisclosed portion of a fifty ($50.00) dollar feeto record documents. But Street imposed separately itemized fees which fullycovered the cost of recording the documents involved.

5. Street failed to provide Mr. Homeowner with the Notice of Right to Cancel requiredby TILA until at least six days after the loan closing.

6. Street failed to provide Mr. Homeowner with the Disclosure Statement required byTILA until at least six days after the loan closing.

7. Street informally required Mr. Homeowner to pay a two thousand nine hundred fiftyfour ($2,954.00) dollar "consulting fee" to The Easy Cash, a mortgage broker whichshared Street's address and which was run by the brother of Street president and soleshareholder.

8. Street required Mr. Homeowner to pay an unreasonable and non-bona fide attorney'sfee to its closing attorney, who also shared Street's address.

9. Street required Mr. Homeowner to pay an unreasonable and non-bona fide"document preparation fee" to its attorney.

10. Street charged Mr. Homeowner a two hundred fifty ($250.00) dollar fee to purchasehis appraisal.

In this petition for preliminary relief, only items 1-5 above will be analyzed, as the facts

concerning the first four are undisputed and pose purely legal questions, and as the circumstances

surrounding the fifth item demonstrate that Mr. Homeowner is likely to prevail on this issue at trial.


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The remaining items (6-10) require further discovery in order to demonstrate the requisite likelihood

of success. However, as even a single violation of the Act's material disclosure provisions justifies

rescission, the analysis of the first five items demonstrates not just a likelihood of success on the

merits, but that a determination of the validity of Mr. Homeowner's rescission is almost inescapable.

II. Facts

In the fall of 1990, Mr. Homeowner responded to The Easy Cash Inc.'s ("Easy Cash")

television and print advertisements offering low interest rate loans by visiting the Easy Cash offices

seeking information about obtaining a mortgage loan to refinance his home. Mr. Homeowner met

with Easy Cash representative Lisa Smith. Ms. Smith informed him that his poor credit precluded

a long term, low interest rate loan, but that if he took out a two year loan with a balloon payment and

made his payments on time, that the Easy Cash would then provide long term, low interest

refinancing as offered in its advertising. Ms. Smith provided Mr. Homeowner with a blank mortgage

application and procured his signature on it. Mr. Homeowner was never provided with a copy of

either the application form he signed or the completed application. As such, Mr. Homeowner never

received the statutorily required notice mandated by Mass. General Laws, c.184, 17B. Mr.

Homeowner had no further contact with Easy Cash until he was subsequently informed that he had

been given a loan commitment.

Mr. Homeowner was led to believe and did believe that Easy Cash was a lender. In fact,

Easy Cash does not provide financing, but instead arranges or "brokers" financing with Street and

other lenders. Easy Cash did not inform Mr. Homeowner either that it was a broker and not a lender,

or that it would impose a broker's fee for the purported service of arranging the Street loan.

Easy Cash, now defunct, was owned, operated and controlled by William Black. Mr. Black

was Easy Cash's sole shareholder, officer and director. Street is owned, operated and controlled by

Susan Black, William Black's sister. Ms. Black is Street's sole shareholder, officer and director. At

all times relevant to this matter, Easy Cash and Street shared the same office address, 100 Natick


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Road, Worcester, Massachusetts.

On November 29, 1990 Mr. Homeowner drove to the loan closing location, the office of

attorney Larry Lawyer. Mr. Lawyer's office, like the offices of Street and Easy Cash, was also

located at 100 Natick Road, Worcester, Massachusetts. Mr. Lawyer was the closing attorney for

Street. However, it was not until Mr. Lawyer provided him with loan papers indicating that Street

was the lender that Mr. Homeowner learned that Easy Cash was not directly providing the financing.

Without Mr. Homeowner's consent or knowledge Easy Cash acted either through a correspondent

lender contract, as broker, or as Street' agent. In any event, Easy Cash did not act pursuant to any

agreement with Mr. Homeowner, either written or verbal.

One of the documents Mr. Lawyer required Mr. Homeowner to sign as a condition of closing

the loan was a so-called "consulting" agreement purporting to authorize the payment of almost ten

percent of the loan proceeds, two thousand nine hundred fifty-four ($2,954.00) dollars, to Easy Cash.

Mr. Homeowner had never seen this agreement before, and had no idea that Easy Cash was a broker,

much less that it would charge this amount as a fee. (A copy of this "Consulting Agreement" is

attached to the Complaint as Exhibit "C1"). Nevertheless, Mr. Homeowner signed the agreement

because he was led to believe that execution of the "consulting" agreement authorizing Easy Cash's

fee of almost ten points was a condition of obtaining the financing.

In addition to the broker's fee, Street, through its attorney Larry Lawyer, charged Mr.

Homeowner a legal fee of one thousand and forty ($1,040.00) dollars, a one hundred ninety five

($195.00) dollar charge for document preparation and a twenty five ( $25) dollar charge for

amortization schedules. Mr. Homeowner, in fact, neither requested nor received the amortization

schedules for which he was charged, nor is the $25 charge the bona fide and reasonable cost of

producing such computer generated schedules on a two year note. Most notably, as this was a

non-amortizing loan, the amortization schedules were of no use to Mr. Homeowner.

Street charged Mr. Homeowner two hundred fifty ($250.00) dollars for a "full title

examination;" fifty ($50.00) dollars for "updating of title; recording of documents;" twenty five


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1 Street also recorded an assignment of the mortgage to a third party, Blue Mortgage Corp.,on December 27, 1990, but as noted infra, an assignment to a third party is a transactionindependent of the loan closing, for which any charge imposed by the lender on the borrowermust be disclosed as a finance charge.

($25.00) dollars for "mortgage recording;" and ten ($10.00) dollars for "assignment of mortgage."

The only document recorded in connection with this transaction was the mortgage.1

Mr. Homeowner was completely unaware of any of the terms of the loan until he was

presented with the loan documents at the closing. Neither Street nor his "consultant" Easy Cash had

informed him of the terms prior to the closing. Those terms were both complicated and onerous:

! Upwardly Adjustable Interest rate: The note rate was 15.99% per annum for the first threemonths of the loan, then was to be adjusted to the greater of 18% per annum or the Bank of NewEngland prime rate plus ten percentage points. The loan could only be adjusted upward, the ratecould not decrease, and had to increase by at least two points, to 18%, after the first three months.The loan did contain a 36% percent per annum rate ceiling. At the change date the rate wasincreased to nineteen (19%) per annum. The annual percentage rate was disclosed as 26.25%.

! Monthly Payments: The loan was non-amortizing, payments were of interest only.Monthly payments for the first three months were four hundred thirteen dollars and eight cents($413.08). Payments thereafter were of four hundred ninety dollars and eighty three cents ($490.83).

! Loan term: Two years. A balloon payment of the entire principal and any accrued interestwas due November 28, l992.

! Points: Street collected and retained an origination fee of one percentage point, threehundred ten ($310.00) dollars.

! Rate Buydown: Street collected and retained two thousand nine hundred eighty one($2,981.00) dollars as a "rate buydown."

! Broker's Fees: Street collected two thousand nine hundred and fifty four ($2,954.00)dollars of the loan proceeds and disbursed them to Easy Cash, as a "Financial Consultant."

Neither attorney Lawyer nor Street provided Mr. Homeowner with any of the loan documents

or the disclosures required by TILA when he left the closing. Mr. Homeowner left the loan closing

without any papers whatsoever, having been told that the papers would be mailed to him "in a few

days." Approximately six days later, Mr. Homeowner received the papers, including the TILA

disclosures, in the mail.


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2 As "[t]he relevant disclosure provisions of the state and federal statutes are apparentlyidentical, and both federal and state courts have recognized that the policies underlying the twostatutes are also identical...." Bizier v. Globe Financial Services, Inc., 654 F.2d 1, 2 (1st Cir.1981), for the sake of simplicity and brevity, this memorandum will cite only the federal statute,regulation, and caselaw.

3 US Trust and other institutional lenders had earlier reached agreements with the AttorneyGeneral to end the Attorney General's investigations into alleged unfair lending practices. Thelenders agreed to provide approximately thirty million dollars of below market rate financing tovictims of predatory lending practices and others who met certain demographic criteria and wereselected in lotteries held under the Attorney General's auspices.

Despite the onerous terms and the peremptory way in which they were made known to him,

Mr. Homeowner made every payment on the loan on or before the due date. In mid-summer, l992,

with the two year balloon coming due, Mr. Homeowner sought to convert the Street loan to the low

interest rate, long term loan the Easy Cash representative told him he could have if he made his

payments on time. Easy Cash informed him that they were no longer making or arranging such

loans, and referred him to Street. Street informed Mr. Homeowner that they would not make such

a loan, emphasized that his balloon note was coming due in a few months and urged him to find

alternative financing.

On or about January 22, 1993 Mr. Homeowner, through his attorney, notified the defendant

that he was exercising his right to rescind the transaction pursuant to 15 U.S.C. 1635 and M.G.L.

c. 140D, 10.2 A copy of the letter by which Mr. Homeowner exercised his rescission rights is

attached to the Complaint as Exhibit F. Street categorically refused to honor the valid rescission.

A copy of the letter by which Street disavowed the rescission notice is attached to the Complaint as

Exhibit G. Attempts to reach a non-adversarial settlement of the plaintiff's rescission claim

encompassed the following nine months, during which Mr. Homeowner sought alternative financing.

During this time, Street commenced foreclosure proceedings.

Mr. Homeowner was selected in a lottery held by US Trust Company as a prospective

recipient of refinancing monies to be used to save his home from Street's threatened foreclosure. 3

US Trust issued Mr. Homeowner a loan commitment for forty five thousand ($45,000.00) dollars

under this special hardship program to enable him to pay off his first mortgage (of approximately


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ten thousand ($10,000.00) dollars) as well as the Street second mortgage of thirty one thousand

dollars, and thereby preserve his home. The loan commitment locked in a fixed interest rate of six

and one-eighth (6.125%) percent.

A loan closing was scheduled for October 20, l993. Despite US Trust's earlier request, Street

did not provide a payoff figure until October 21, 1993, delaying the prospective closing for at least

a day. When Street' payoff communication was transmitted through its lawyers, it contained a

demand of almost forty two thousand ($42,000.00) dollars. This demand included over ten thousand

($10,000.00) dollars of charges in addition to loan principal for ostensibly accrued interest and legal

fees. The demand was accompanied by a condition that Mr. Homeowner release his rescission claim

and all other claims he had against Street. A copy of the Street payoff communication and demand

for release, addressed to US Trust's settlement agent, is attached to the Complaint as Exhibit H. The

Street demand exceeded by seven thousand ($7,000.00) dollars the US Trust proceeds which were

to be available. Mr. Homeowner did not have the seven thousand ($7,000.00) dollars in cash which

would have been necessary to allow a closing. When the closing was aborted, Street then sought to

press ahead with a scheduled foreclosure auction sale of Mr. Homeowner's home, necessitating the

emergency filing of a chapter 13 petition.

Mr. Homeowner's US Trust loan commitment expired of its own terms after the aborted

closing. In light of the circumstances, US Trust has agreed to extend the loan commitment through

January 20, l994.

III. Argument

The Validity of the Plaintiff's Rescission on Any of Four Independent Bases is Evidentfrom Undisputed Documents

As noted, any of the first four violations itemized in the Introduction of this memorandum

provide an independent, indisputable basis for rescission. Although these violations do not involve

large amounts of money, "any understatement of the finance charge is material because any


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4 The House of Representatives report accompanying TILA noted how important the use ofcredit has become in the United States: "Consumer credit has become an essential feature of theAmerican way of life. It permits families with secure and growing incomes to plan ahead and toenjoy fully and promptly the ownership of automobiles and modern household appliances. Itfinances higher education for many who otherwise could not afford it. To families struck byserious illness or other financial setbacks, the opportunity to borrow eases the burden byspreading the payments over time." H. Rep. No. 1040, 90th Cong., 1st Sess. 8-9, reprinted in1968 U.S. Code Cong. & Admin. News 1965.

understatement would be of some significance to a reasonable consumer." Steele v. Ford Motor

Credit Co., 783 F.2d 1016 (11th Cir. 1986). The reasons why Congress created this extraordinary

remedy of rescission and decided to enforce it through a strict liability standard are best understood

in the context of the Act's creation and the Congressional policy it serves.

TILA is Designed to Protect Consumers by Providing theInformation Necessary to Make Intelligent Decisions

in the Credit Marketplace

The purpose of TILA is to enable consumers to intelligently shop for credit (15 USC

1601(a)).4 In particular, TILA "was passed to aid the unsophisticated consumer so that he would

not be easily misled as to the total costs of financing." Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246,

248 (3d. Cir. 1980); Shepeard v. Quality Siding & Window Factory, Inc., 730 F.Supp. 1295, 1299

(D.Del. 1990); Morris v. Lomas and Nettleton Co., 708 F.Supp. 1198, 1203 (D.Kan 1989);

Goldberg v. Delaware Olds, Inc., 670 F.Supp. 125, 127 (D.Del. 1987). See alsoMourning v. Family

Publications Service, Inc., 411 U.S. 356, 363-69, 93 S.Ct. 1652, 1657-60, 36 L.Ed.2d 318 (1973).

It was thought that "through TILA, Congress [could] remedy the [sq]divergent and often fraudulent

practices by which credit customers were apprised of the terms of the credit extended to them.'"

Smith v. Fidelity Consumer Discount Co., 898 F.2d 896, 898 (3d. Cir. 1988). "Congress designed

the law to apply to all consumers, who are inherently at a disadvantage in loan and credit

transactions." Jackson v. Grant, 890 F.2d 118, 122 (9th Cir. 1989); Semar v. Platte Valley Federal

S & L Ass'n,791 F.2d 699, 705 (4th Cir. 1983).

To achieve this purpose, TILA requires that the true "cost" of credit be stated as both an


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interest rate (annual percentage rate, or APR) and as a dollar amount (Finance Charge). The APR

incorporates certain fees and charges imposed as part of the credit transaction, and which Congress

has determined to be part of the "costs" of obtaining financing. As such, a note with a ten percent

interest rate, executed as part of a transaction which imposes such additional "finance charges," may

have an APR, or "true" interest rate, of twelve percent. Correspondingly, the finance charge

discloses the net effect of such additional costs of credit as a dollar figure. Essentially, "...TILA

requires a creditor to issue the debtor a disclosure statement summarizing certain information found

in the loan documents." In re McCausland v. GMAC Mortgage Corp. of Pennsylvania , 63 B.R. 665,

667 (Bankr. E.D. Pa. 1986). These disclosures are to be set forth "...in writing and in a particular

manner." Shepeard v. Quality Siding and Window Factory, Inc., supra. at 1299 (emphasis added).

The Rescission Remedy Protects Consumers and Provides Congress With aSelf-Enforcement Mechanism to Ensure the Act's Viability

Only when a creditor makes accurate disclosure of the true cost of credit can a consumer

compare different lenders' offerings and make an informed credit decision. The House of

Representatives report accompanying TILA provides that "[y]our committee believes that . . . the

credit disclosure features of [TILA] . . . [are] fundamental to its legislative purpose. This aspect

of the bill is designed to provide consumers with basic information in connection with their credit

transactions so that they may effectively comparison shop' for credit in order to obtain credit on the

most favorable terms available in the market place." (Emphasis added.) H. Rep. No. 1040, 90th

Cong., 1st Sess. 18, reprinted in 1968 U.S. Code Cong. & Admin. News 1975. Thus, TILA seeks

to effectuate its public policy of promoting the informed use of credit by requiring lenders to disclose

credit terms to consumers. The House of Representatives report further provides that "[f]or the

relatively unsophisticated consumer, particularly those of modest means, [TILA] . . . will provide

their only protection against unscrupulous merchants or lenders. . . . These provisions not only will

protect the consumer, but will further protect the honest businessman from unethical forms of

competition engaged in by some unscrupulous creditors who prey upon the poor through deceptive


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5 The "material disclosures" are the annual percentage rate, the finance charge, the amountfinanced, the total of payments, and the payment schedule. 15 USC 1602(u), Regulation Z,226.23(a)(3), n.48.

6 This right extends for three years under the federal statute (15 USC 1635), four years underthe state law (G.L. c. 140D, 10).

credit practices." H. Rep. No. 1040, 90th Cong., 1st Sess. 18, reprinted in 1968 U.S. Code Cong.

& Admin. News 1975-76.

In addition, when a consumer loan is secured by a mortgage on the borrower's home, he or

she has an unqualified right to cancel the transaction up to three business days after the closing. 15

USC 1635. This rescission right provides a borrower the time to examine the TILA disclosures at

home, reflect on the prudence of the borrowing decision in light of those disclosures, and, if

discretion seems advised, to cancel the transaction with impunity. To provide a self-enforcement

mechanism which promotes such accurate disclosures, Congress provided that the failure of a

creditor to comply with certain of TILA's disclosure requirements (the "material disclosures")5 gives

the borrower an extended right to rescind the transaction. 15 USC 1635, Regulation Z, 226.23.6

The reason that the failure to provide these disclosures extends the rescission right is that

Congress has determined that without accurate disclosure of these five components of the

prospective consumer credit transaction, borrowers do not have all information material to their

borrowing decision, and are therefore presumed unable to make an informed credit decision. As a

corollary, the Act was amended to include this statutory definition of "material disclosures" in order

to put creditors "in a better position to know whether a consumer may properly rescind a

transaction." S. Rep. No. 368, 98th Cong. 2d Sess. at 29, reprinted in l980 U.S. Code Cong. and

Admin. News 236, 264 (emphasis added).

TILA Achieves its Remedial Goals by A System of Strict Liability

To further this congressional policy TILA achieves its remedial goals by a system ofstrict


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7 The error tolerance for finance charges is ten dollars (Regulation Z, 226.18(d), n. 41.

8 This rule is inviolate and is followed by courts in all jurisdictions. See, e.g., Smith v.Fidelity Consumer Discount Co., 989 F.2d 896, 898 (3rd Cir. 1990)(The federal Truth in LendingAct (TILA) achieves its remedial goals by a system of strict liability in favor of consumers whenmandated disclosures have not been made); Lewis v. Dodge, 620 F.Supp. 135, 138 (D. Conn.1985); In re Porter, 961 F.2d 1066 (3rd Cir. 1992); Rowland (John M., Carol S.) v. MagnaMillikin Bank of Decatur, N.A., 812 F.Supp. 875 (C.D. Ill. 1992) ("even technical violations willform the basis for liability"); New Maine Nat. Bank v. Gendron, 780 F.Supp. 52 (D. Me. 1992);Dixon v. S & S Loan Service of Waycross, Inc., 754 F.Supp. 1567 (S.D. Ga. 1990); Woolfolk v.

Van Ru Credit Corp., 783 F.Supp. 724 (D. Conn. 1990) (same with Unfair Debt CollectionPractices Act); Morris v. Lomas and Nettleton Co., 708 F.Supp. 1198 (D. Kan. 1989); Jenkins v.Landmark Mortg. Corp. of Virginia, 696 F.Supp. 1089 (W.D. Va. 1988); Laubach v. FidelityConsumer Discount Co., 686 F.Supp. 504 (E.D. Pa. 1988); Searles v. Clarion Mortg. Co., 1987WL 61932 (E.D. Pa. 1987); "Liability will flow from even minute deviations from requirementsof the statute and Regulation Z." Dixon v. S & S Loan Service of Waycross, Inc., 754 F.Supp.1567, 1570 (S.D. Ga. 1990); Shroder v. Suburban Coastal Corp., supra.at 1380; Charles v.Krauss Co., Ltd., 572 F.2d 544 (5th Cir. 1978).Shroder v. Suburban Coastal Corp., 729 F.2d1371, 1380 (11th Cir. 1984) ; Goldberg v. Delaware Olds, Inc., 670 F.Supp. 125 (D. Del. 1987);Curry v. Fidelity Consumer Discount Co., 656 F.Supp. 1129 (E.D. Pa. 1987); Laubach v. FidelityConsumer Discount Co., 1986 WL 4464 (E.D. Pa. 1986); In re Wright, 133 B.R. 704 (E.D. Pa.1991); Moore v. Mid-Penn Consumer Discount Co., 1991 WL 146241 (E.D. Pa. 1991); In reMarshall, 121 B.R. 814 (Bankr.C.D. Ill. 1990); In re Steinbrecher, 110 B.R. 155 (Bankr.E.D. Pa.1990); Nichols v. Mid-Penn Consumer Discount Co., 1989 WL 46682 (E.D. Pa. 1989); In reMcElvany, 98 B.R. 237 (Bankr.W.D. Pa. 1989); In re Johnson-Allen, 67 B.R. 968 (Bankr.E.D.Pa. 1986); In re Cervantes, 67 B.R. 816 (Bankr.E.D. Pa. 1986); In re McCausland, 63 B.R. 665,55 U.S.L.W. 2214, 1 UCC Rep.Serv.2d 1372 (Bankr.E.D. Pa. 1986); In re Perry, 59 B.R. 947(Bankr.E.D. Pa. 1986); In re Schultz, 58 B.R. 945 (Bankr,E.D. Pa. 1986); Solis v. FidelityConsumer Discount Co., 58 B.R. 983 (E.D. Pa. 1986).

liabilitin favor of consumers when mandated disclosures have not been made. 15 U.S.C. 1640(a)

(emphasis added). The standard applied is considered "strict liability in the sense that absolute

compliance is required and even technical violations will form the basis for liability." Shepeard v.

Quality Siding & Window Factory, Inc., supra. at 1299; In re McElvany, 98 B.R. 237, 240 (Bankr.

W.D. Pa. 1989). This means that "technical or minor7 violations of TILA, or Reg. Z, as well as

major violations impose liability on the creditor and entitle the borrower to rescind [the loan]."

Smith v. Wells Fargo Credit Corp., 713 F.Supp. 354, 355 (D.Ariz. 1989); Jackson v. Grant, 890

F.2d. 118, 120 (9th Cir. 1989); Semar v. Platte Valley Fed. S & L Assoc., supra. at 704.8

The first circuit court of appeals has unequivocally stated that any violation of TILA,


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regardless of the technical nature of the violation, must result in a finding of liability against the

lender.Bizier v. Globe Financial Services, Inc., 654 F.2d 1, 3 (lst Cir. 1981). TILA is a remedial

statute which is designed to balance the scales "thought to be weighed in favor of lenders," and is

therefore to be liberally construed in favor of borrowers.Id. A creditor who fails to comply with

TILA in any respect is liable to the consumer under the statute, regardless of the nature of the

violation or the creditor's intent. Thomka v. A.Z. Chevrolet Inc., 619 F.2d 246, 249-50 (3d Cir.

1980). Even if the borrower can demonstrate no actual damages, TILA's penalties are applied

regardless of whether the borrower was misled or injured. See, Griggs v. Provident Consumer

Discount Co., 680 F.2d 927, 932-33 (3d Cir.), vacated on other grnds, 459 U.S. 56, 103 S.Ct. 400,

74 L.Ed.2d 225 (1982).

This strict compliance rule is what makes TILA so effective. "This strict interpretation of

the TILA has largely been responsible for the TILA's success in achieving widespread compliance

with its requirements." In re Brown, 106 B.R. 852, 857 (Bankr. E.D. Pa. 1989).

Street's Failure to Disclose as Finance Charges the Fees for theAmortization Schedule, Assignment Recording, Title Update and

Document Recording Entitled Mr. Homeowner to Rescind the Loan

As noted in the introduction to this memorandum, Street's failure to disclose the four

enumerated fees as finance charges presents a purely legal question for the court: "Were any of these

fees finance charges?" An affirmative answer requires a finding that Mr. Homeowner's rescission

was valid. As such, Mr. Homeowner will not only have demonstrated a likelihood of success on the

merits, but a certainty of it. Accordingly, summary disposition in Mr. Homeowner's favor should

follow. As with the somewhat counterintuitive concept of rescission, the concept of the finance

charge under TILA is also best understood in the context of the Act's aims and the methods by which

Congress has sought to meet those aims.


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Disclosure of the Finance Charge is at the Heart of TILA

Disclosure of the finance charge is at "the heart" of TILA. National Consumer Law Center,

Truth in Lending 59 (2d. ed. l989). The finance charge and the APR are the most important

disclosures in the entire Act, accordingly, they must be disclosed more conspicuously than even the

other "material disclosures." 15 USC 1632(a); Regulation Z, 226.17(a)(2). "The most important

information in a credit purchase is that which explains differing net charges and rates." Milhollin

v. Ford Motor Credit Co., 444 US 555, 568-69, 100 S. Ct. 799, 63 L. Ed.2d 22 (l980). TILA's

material disclosures "serve to provide an easy basis for comparison of the terms offered by

competing creditors." Grey v. European Health Spas, Inc., 428 F. Supp. 841 (D. Conn. l987).

Regulation Z, 226.4(a) defines the term finance charge as:

...the cost of consumer credit as a dollar amount. It includes any charge payabledirectly or indirectly by the consumer and imposed directly or indirectly by thecreditor as an incident to or a condition of the extension of credit. It does not includeany charge of a type payable in a comparable cash transaction.

This definition is "all-inclusive", i.e., any charge which meets this broad definition is a "finance

charge," unless specifically excluded from the rule's application by other provisions of TILA. See,

Rohner, The Law of Truth in Lending, 3.02 (l984). Regulation Z 226.4(c)(7) sets forth special

rules which apply only in secured real estate transactions to exclude certain bona fide and reasonable

charges from classification as finance charges. The specific exclusions are:

(i) Fees for title examination, abstract of title, title insurance, property survey, andsimilar purposes.

(ii) Fees for preparing deeds, mortgages and reconveyance, settlement, and similardocuments.

(iii) Notary, appraisal, and credit report fees.

(iv) Amounts required to be paid into escrow or trustee accounts if the amounts wouldnot otherwise be included in the finance charge.


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It is well-established that "only those charges specifically exempted from inclusion in the

[sq]finance charge' by statute or regulation may be excluded from it." Burford v. American Finance

Co., 333 F.Supp. 1243, 1247 (N.D. Ga. 1971). See alsoAbbey v. Columbus Dodge, Inc., 607 F.2d

85, 86 (5th Cir. 1979); Campbell v. General Finance Co., 523 F.Supp. 989, 992 (W.D.Va. 1981);

Dalton v. Bob Neill Pontiac, Inc., 476 F.Supp. 789, 794 (M.C.N.C. 1979); and Campbell v. Liberty

Financial Planning, Inc., 422 F.Supp. 1386, 1388-89 (D.Neb. 1976). See,In re Celona, 90 B.R.

104, 112 (Bkrtcy.E.D.Pa. 1988). Therefore, only those specific exclusions enumerated in Regulation

Z 226.4(c)(7) will be excluded from finance charges.

The failure to disclose charges which, by the definitions set out in the statute and regulation,

are clearly finance charges, misinforms the borrower as to the true cost of credit and frustrates the

policy behind the Act. As outlined below, Street has failed to disclose as finance charges four

separate charges which meet the law's definition as such and about which there is no factual dispute.

1. Street Failed to Disclose as a Finance Charge its Twenty Five Dollar Fee for an UnnecessaryAmortization Schedule

Street imposed a twenty five dollar fee on Mr. Homeowner for the ostensible purchase of an

amortization schedule. However, as Street made Mr. Homeowner an interest only (i.e.,

non-amortizing) loan, in essence it charged him twenty five dollars for a useless piece of paper. Mr.

Homeowner did not request the schedule, nor in fact did he receive it. The charge was simply

contained on the loan documents which were presented to him at the closing as a fait accompli.

Street cannot dispute that the loan is non-amortizing, nor that the twenty five dollar fee was

imposed, but instead contends that it was independently assessed by its lawyer, and as such, cannot

be attributed to the lender for purposes of TILA disclosure requirements. This position is completely

at odds with the Act and Regulation Z.

The concept of the term "finance charge" under TILA has been detailed above. With respect

to this particular type of finance charge, the Federal Reserve Board Commentary to Regulation Z

states, in relevant part:

226.4(a)(3). Charges by Third Parties.


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9 In drafting Regulation Z to implement the Truth in Lending Act, the Board wasconcerned that the exclusion of closing costs from the finance charge might beused by unscrupulous creditors to circumvent the requirements of the Act.Accordingly, the phrase "reasonable in amount" was inserted in paragraph (e) ofsection 226.4 in order to serve as a warning and barrier to those who otherwisemight entertain thoughts of evading disclosure requirements by inflating theclosing costs. We have been informed that closing costs vary widely in differentparts of the country, and it was our intention that reasonableness would bedetermined by comparing charges of a particular creditor with the prevailingpractices of the industry in his locality. In this way, it will be possible to findthose creditors who are failing to make proper disclosures.

Excerpts from FRB Letter of March 27, l969 by William C. McMartin, Jr., CCH ConsumerCredit Guide, 30,009, Report 27-160 (February 6, l970).

...[C]harges imposed on the consumer by someone other than the creditor are financecharges (unless otherwise excluded) if the creditor requires the services of the thirdparty.

Street also cannot dispute that it required Mr. Homeowner to pay for attorney Lawyer's fees

for services he performed on Street' behalf. As the regulation makes clear, the amortization schedule

charge imposed by Mr. Lawyer is a finance charge "unless otherwise excluded." This charge could

only be otherwise excluded if enumerated in the specific exclusions to Regulation Z, 22.4(c)7,

which it clearly is not. Even if it were, it would also have to be bona fide and reasonable. Clearly,

a fee for a useless document is not bona fide and reasonable.9 See Commonwealth v. DeCotis, 366

Mass. 234 (1974)(imposing charge for no useful service is unfair and deceptive practice in violation

of c. 93A). The amortization schedule charge is a finance charge.

This violation alone is sufficient to demonstrate that Mr. Homeowner's rescission was valid.

As such, there is no legal or practical reason for further analysis -- Mr. Homeowner is not only

entitled to injunctive relief, but to a summary disposition in his favor on his rescission claim. The

following violations only serve to further illustrate the validity of his claim.

2. Street Failed to Disclose as a Finance Charge A Future Mortgage Assignment Recording Feeof Ten Dollars

Street imposed a ten dollar fee on Mr. Homeowner to pay for the cost of recording its


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10 As contrasted with the twenty six percent retained here.

11 Although the mortgage was never, in fact, assigned. Cf. Shroder v. Suburban CoastalCorp., 729 F.2d 1371 (11th Cir. 1984)(court held that failure to include assignment recording feein finance charge was not a violation of TILA. Unlike this case, Cheshire and Brown, Shroderwas an appeal of denial of class action certification, in which the court decried the game ofgotcha it intimated the plaintiffs were playing in seeking to hold the lender liable to an entireclass for extremely technical violations of the Act, without any apparent damages having beensuffered. Id., at 1385.

assignment of the mortgage to a third party. This fee is also a finance charge. Regulation Z,

226.4(b)(6). SeeIn re Brown, 106 B.R. 852, 858-859 (Bankr. E.D. Pa. 1989); Cheshire Mortgage

Service v. Montes, 223 Conn. 80 (1992).

Regulation Z, 226.4(b)(6) states that a finance charge includes "[c]harges imposed on a

creditor by another person for purchasing...a consumer's obligation, if the consumer is required to

pay the charges in cash as an addition to the obligation...". In the present case, Street required Mr.

Homeowner to pay in cash from the loan proceeds a "[charge] imposed on [Street] by another person

[namely, an assignee,] for purchasing...[Mr. Homeowner's] obligation...".

The Connecticut Supreme Court recently articulated the reasoning and policy supporting the

characterization of an assignment recording fee as a finance charge under TILA. In Cheshire

Mortgage Service v. Montes , 223 Conn. 80 (1992), the court examined a similar, high interest, short

term loan, in which approximately fifteen percent10 of the proceeds were retained by the lender as

prepaid charges. The loan was for $43,500 at nineteen percent interest. The lender retained $6,801

in points and closing costs. The loan term was three years, with a balloon payment of $44,075.03

due at the end of the term. Id., at 86. The lender charged the borrowers a thirty two dollar fee for

recording a future assignment of the mortgage. Id., at 96.11 As the borrower had asserted its right

to rescind, and was appealing a lower court foreclosure judgment, the court engaged in a thoughtful

analysis of the issue, concluding that the lender's failure to disclose a mortgage assignment recording

fee (whether the assignment was made or not) as a finance charge violated TILA's material

disclosure requirements and entitled the borrowers to rescind the loan. The relevant portions of the

court's analysis are contained below.


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Regulation Z, 226.4(a) defines a finance charge as "the cost of consumer credit asa dollar amount. It includes any charge payable directly or indirectly the consumerand imposed directly or indirectly by the creditor as an incident to or a condition ofthe extension of credit." Based on this definition, a fee charged to a borrower torecord the future assignment of a mortgage is a finance charge because it certainly isa charge payable directly by the consumer and imposed directly by the creditor as an

incident to the extension of credit. This conclusion is bolstered by Regulation Z,226.4(b)(6) which states that a finance charge includes "[c]harges imposed on acreditor by another person for purchasing . . . a consumer's obligation, if theconsumer is required to pay the charges in cash as an addition to the obligation . . .." In the present case, the plaintiff required the defendants to pay in cash a "[charge]imposed on [the plaintiff] by another person [namely, an assignee,] for purchasing. . . [the defendants'] obligation . . . ." Id., at 97, 98.

...A fee for recording a future assignment of the mortgage does not relate to aperfection of the security interest created by the mortgage. That security interest wasperfected when the mortgage itself was recorded....In the present case, the potentialassignment of the mortgage to another person would have been unrelated to the loanmade to the defendants, but would have related to a separate future transaction

between the plaintiff and a buyer of the mortgage loan. Our conclusion is supportedby 15 U.S.C. 1605(d) and (e), which exclude certain fees from the definition offinance charge if they are fees "with respect to that transaction." (Court's emphasis.)We conclude, therefore, that a fee charged to a borrower to record the futureassignment of a mortgage is a finance charge and that since, in the present case, thecharge was paid at the consummation of the transaction, it was a prepaid financecharge. Id., at 99, 100.

Having found that the fee should have been disclosed as a finance charge, the court noted that

although the amount of money involved was perhaps "minuscule," rescission was nevertheless

mandated by TILA's strict liability standard.

Thus, the plaintiff failed accurately to disclose and include the futuremortgage assignment recording fee in the prepaid finance charge. Since this chargewas not included in the prepaid finance charge, the overall finance charge was alsounderdisclosed. This resulted in a material nondisclosure in violation of TILA and,therefore, the defendants had the right to rescind the May, 1988 loan transaction. Werecognize that non-disclosure of a $55 fee may seem minuscule in the context of a$43,500 loan transaction. "However, once the court finds a violation, no matter howtechnical, it has no discretion with respect to the imposition of liability." Id., at101-102, quoting Grant v. Imperial Motors, 539 F.2d 506, 510 (5th Cir. 1976).

The same rationale applies here. Street violated the Act and failed to honor Mr.

Homeowner's rescission notice informing it of those violations. This is another independent basis

for rescission.

3. Street Failed to Disclose Non-excludable Title Fees as Finance Charges


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12 Of course